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Why the Rio Tinto share price is outperforming its peers

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The S&P/ASX 200 Index (Index:^AXJO) surrendered its morning gains as did most of the major miners. But the Rio Tinto Limited (ASX: RIO) share price is proving to be one of the few exceptions.

The 1.2% jump in Rio Tinto’s share price to $100.25 this afternoon is made even more notable as speculation swirls that is may be forced to boot its chief executive.

The Australian Financial Review reported that Jean-Sebastien Jacques and top of his top lieutenants may be forced to resign after the miner “accidentally” blew up the culturally significant Juukan Gorge.

Rio Tinto shares upgraded to “buy”

But investors aren’t too fussed even as the BHP Group Ltd (ASX: BHP) share price dips into the red and Fortescue Metals Group Limited (ASX: FMG) share price loses 0.8% to $17.86.

Perhaps an upgrade by Citigroup could be making the difference. The broker declared the stock its top pick for the sector as it lifted its recommendation on Rio Tinto to “buy” from “neutral”.

This bullish review comes after Citi admitted that it had been too pessimistic about the iron ore price.

Iron ore price stronger for longer

“While we expect a modest price pullback in the iron ore near term, we now forecast benchmark iron ore to stay in a range of US$100-$120/t for the balance of 2020,” said the broker.

“We also lift forecasts for 2021-23 based on a more constructive Chinese steel demand outlook.”

Citi is now expecting iron ore prices to average US$90 a tonne in 2021, US$80 a tonne in 2022 and US$75 a tonne in the following year. This compares to its previous forecast of US$60 to US$65 a tonne for the three years.

China and Brazil driving upgrades

“A re-focus on the domestic market as a key growth driver, highlighted during the mid-year politburo meeting, suggests that steel-intensive sectors including property, infrastructure and automotive sectors remain key pillars for China’s economic growth,” added the broker.

“As a result, we now expect steel end use demand to rise 1-2% y/y per annum during 2021-23, compared to our earlier forecast of a modest 1% decline per annum.”

It’s not only stronger demand from China that is driving the upgrade. The broker also thought supply would be better than reality but the devastating COVID-19 outbreak in Brazil is curbing output.

Big earnings boost

While Citi isn’t its long-term price projection for the steel making mineral to fall to US$60 a tonne, it acknowledges that the commodity will take a longer than expected time to get there.

The brighter near to medium-term forecast for iron ore will lead to a big increase in earnings for iron ore stocks. But Rio Tinto is the best placed to benefit given size of iron ore footprint.

However, it isn’t only Rio Tinto that got upgraded. Citi also lifted its rating on the Mount Gibson Iron Limited (ASX: MGX) share price to “buy” from “neutral”, although it calls the smaller miner a “high-risk” investment.  

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Motley Fool contributor Brendon Lau owns shares of BHP Billiton Limited and Rio Tinto Ltd. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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